China-Africa relations move forward

The latest, triennial Forum on China-Africa Co-operation (FOCAC), held in Beijing on September 3rd-4th, cements China's role as one of Africa's key partners, in terms of loan finance, investment and trade. With delegations from almost all African states in attendance, including many at the head of state level (including South Africa, Egypt and Kenya), China's president, Xi Jinping, unveiled loan and investment commitments of US$60bn over the next three years, with a significant portion geared to addressing Africa's large infrastructure deficit. Apart from cementing China's role as a key partner, the latest summit's significance is amplified by two factors: the deepening of China's Belt and Road Initiative, which places its engagement with Africa in a broader context; and the emergence of US‑led protectionism, which is allowing China to position itself as the defender of a multilateral, rules-based trading system, giving a further boost to the country's influence.

The US$60bn sum pledged by China at the 2018 summit is the same as in 2015 (when South Africa hosted the FOCAC), although it will be structured differently, to reflect shifting priorities. The total amount, to be spread over three years, will comprise grants, interest-free loans and concessional loans (US$15bn), credit lines (US$20bn), a special fund to deepen China-Africa relations (US$10bn) and projected direct investment by Chinese firms (US$10m). The final US$5bn constitutes a second special fund, geared to boosting China's imports from Africa, which fell sharply in 2015‑16, thereby turning China's former trade deficit with the continent into a large surplus. China also plans to make it easier for African countries to issue bonds in China. Partly to deal with criticism of lax safeguards surrounding Chinese projects, Mr Xi signalled a renewed focus on environmental issues, potentially heralding greater involvement in renewable energy. Mr Xi also criticised "vanity" projects, although he failed to specify which ventures fall into this category. To address concerns that China is loading Africa with unsustainable debt, the Chinese premier announced a partial debt write-off, covering interest-free loans owed by poor or landlocked countries and small island nations.

Despite the debt forgiveness on offer, the debate over whether China's loans to African countries are sustainable—and therefore of longer-term benefit—remains unsettled. Research by Johns Hopkins University downplays the potential dangers arising from Chinese lending, noting that just three countries—Djibouti, Congo (Brazzaville) and Zambia—are excessively reliant on Chinese loans (in terms of the proportion of foreign debt held by China). A smaller degree of risk attaches to Cameroon, Ethiopia, Ghana, Mozambique, Sudan and Zimbabwe. Moreover, after Chinese lending to Africa surged to US$30bn in 2016, thereby lifting total disbursements to about US$125bn since 2006, the sum fell to a provisional US$9bn in 2017, according to Johns Hopkins (although the figure may still be revised upwards). Notably, about 60% of Chinese lending has been directed towards infrastructure projects. Critics of heavy Chinese lending point to the risks posed to sovereignty, however, citing the case of a Sri Lankan port placed into Chinese hands on a long lease in lieu of debt payment. Djibouti has made a similar concession to China, after heavy debt accumulation.

Analysis by The Economist Intelligence Unit finds Kenya to be a useful (and more balanced) example of how Chinese lending affects Africa. Kenya's bilateral debt to China has risen sharply, from just US$0.94m in 2013 (8.8% of the total) to US$5.2bn in 2017 (22.8% of the total), although the increase is smaller than for commercial bank borrowing (including sovereign bonds), which soared from US$0.69bn in 2013 to US$6.86bn in 2017 (30.1% of the total). Most of Kenya's Chinese loans are non-concessional, but they are typically cheaper to service than bank loans (or bonds). In addition, Chinese lending to Kenya is largely accounted for by a new standard-gauge railway, which, although overpriced, is at least yielding practical benefits. By contrast, a large part of Kenya's US$2bn sovereign bond in February 2018 continues to prop up foreign-exchange reserves, which is a costly way of bolstering import cover. Caution towards massive borrowing from China is warranted, but Kenya's example shows that an even heavier reliance on commercial borrowing, including sovereign bonds, poses a greater threat to overall debt sustainability.

Investment heads higher

Data on foreign direct investment (FDI) flows by source country are in short supply, although China's contribution has undoubtedly risen strongly over the past decade. The latest World Investment Report from the UN Conference on Trade and Development (UNCTAD) suggests that China's FDI stock in Africa climbed to US$40bn in 2016, from US$16bn in 2011, placing it in fourth position behind the US (US$57bn), the UK (U$55bn) and France (US$49bn). In comparison with China, FDI stocks for the top three were little changed over the period. Inflows from China, as from other countries, are mainly driven by commercial factors, although the government's prominent role in the Chinese economy (and its stake in numerous Chinese firms) adds an extra, political dimension. This makes it more likely that Mr Xi's target of US$10bn in African FDI over the next three years will be realised. Barring major new investment from traditional Western sources, China will continue to climb up Africa's FDI league, perhaps overtaking the US in the medium term.

Trade flows decline

China's total trade with Africa grew briskly until peaking in 2014, at US$221.6bn, according to Chinese official data, before a sharp slide in 2015 and 2016, when the total ebbed to US$149bn, largely because of a sharp downturn in imports, in line with commodity price trends, especially for oil. Imports from Africa jumped from US$67.1bn in 2010 to US$117.5bn in 2013, but subsequently sagged, sliding to just US$56.7bn in 2016. Exports to Africa jumped from US$60bn in 2010 to a peak of US$108.5bn in 2015, before dipping to US$92.3bn in 2016. With imports falling far more quickly than exports (which are dominated by machinery and other manufactured goods), China's trade balance with Africa turned from a deficit in 2010‑14 (averaging US$17.9bn a year) to a surplus in 2015‑16 (averaging US$36.9bn a year). The fall in Chinese exports to Africa is probably caused by the same factor as declining imports from Africa, namely lower commodity prices, which have stifled Africa's growth, and hence import demand. Chinese imports from Africa probably rose again in 2017, and are poised for further growth in 2018, but the balance may remain in China's favour, explaining the new fund, announced at the FOCAC to bolster purchases from the continent, especially of non-traditional commodities.

Driven by mutual economic benefits

There is little doubt that China's engagement in Africa is driven primarily by self-interest, both economic and political, and that trade relations are underpinned by China's hunger for commodities and its concurrent need to export finished goods. However, accusing China of having a "colonial" mentality is misguided, as Africa is also benefiting greatly from the relationship, not least in terms of reducing its infrastructure deficit. China's policy of non-interference in domestic politics also contradicts the "colonial" tag, although it also has downsides, by helping autocratic regimes survive. The nature of the relationship will change, as China's rapid growth eases and part of its manufacturing capacity moves offshore, to Africa in some cases. Closer economic integration in Africa, by allowing the continent to speak with a more unified and coherent voice, will also shape the China-Africa partnership, leading to a more equal relationship in the future. US‑led protectionism (and possible isolationism), as well as the EU's preoccupation with internal divisions, will see the China-Africa relationship deepen ahead of the next FOCAC, to be hosted in Africa, in 2021.